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Hewitt’s Financial Results – What Do They Mean?

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Hewitt’s very public financial difficulties continue today, days after announcing quarter-end September 30, 2006 financial results.  It is not my intention to single out Hewitt by writing about them again.  Rather, as the recognized leader in HRO, Hewitt can be viewed as the industry bellwether and can provide insight into the dynamics of the industry.

Taking a look at the results as reported by, we see that Hewitt posted modest (0.9%) revenue gains year over year while net income was down 43%.  Surprisingly, net income was only $23 million on $727 million in revenue.  A deeper dive reveals that the outsourcing arm of the business (over half of the business) experienced declining revenue, income and profitability.

The article goes on to report on Hewitt’s declining market share according to an EquaTerra study.  Take a look at the article if you have the time.

As a bellwether, I would also look to see what else is being said about the market in general.  Are we in fact seeing declining revenue, profitability and income industry wide?  An interesting (un-attributed) article published the end of last month by HRO Today provides some interesting insight.

The article, citing a NelsonHall study, points out that the growth in the industry has definitely slowed and is not meeting analyst expectations.  In fact: 

“The value of BPO TCV (total contract value) awarded has declined by approximately 50 percent in North America from a peak of $15.4 billion in the 12-month period ending September 2004 to $7.5 billion for the 12- month period ending September 2006”

So while Hewitt’s revenues are down, clearly the industry is still growing: albeit at a slower pace than expected or previously enjoyed.  By definition, Hewitt’s market share must be slipping.  But what about profitability and the reasons growth is slowing?  According to HRO, “Contracts are not awarded in 30 percent of instances where BPO is evaluated.” 

There seems to be a disconnect in the general market between supply and demand.  The market is demanding something that is seemingly in short supply: a proven ability to deliver high quality services with operational expertise at cost-reduced levels.

These quotes from the article are telling:

“Eighty percent of U.S. sourcing managers state that lack of process operations knowledge within the vendor has led to rejection of BPO.”

“Superior process capability is essential for BPO vendor success and needs to be more widely demonstrated than at present.”

“Vendors frequently fail to justify the levels of cost reduction promised during the bidding focus. Vendors are offering cost savings but two-thirds of sourcing managers have rejected BPO as a sourcing option because of a lack of belief in the vendor’s ability to deliver the cost savings promised”

So it would seem that while companies look for better process and cost reduction, vendors are falling short of the mark.  “Lift and shift” can be one reason for this.  It’s not unreasonable to ask how a vendor can do it better and cheaper if they use the same people, process and technology.  We have consistently seen that the productivity gains are slow to come.  The market seems to be noting this more than ever as the HROToday article title states: Many Potential Buyers Stay out of Market over Concerns about Delivery.

So as the market demands change in delivery, and change seems to be the key to provider stability, growth and profitability it comes as no surprise to see Russ Fradin make the following statement last week: “Our attention in the near term will be on accelerating the growth of the benefits outsourcing and consulting businesses, and redefining our approach to the HR BPO business.”

I would caution Mr. Fradin to take care not to put the cart before the horse.  Redefining the approach to HR BPO will be critical to the future success of Hewitt and the market in general.

About the authorDonald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.

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3 responses to “Hewitt’s Financial Results – What Do They Mean?”

  1. February this year Hewitt openly stated that the operating margin of the whole company would be impacted by the HRO contracts signed in 2005. On November 10 Hewitt published the results for the last quarter. Donald Glade takes this up in his blog “ Hewitt’s Financial Results, What do they mean?” to analyze the state of the industry. Hewitt’s outsourcing business still experiences declining revenue, income and profitability although the overall market of BPO (Business Process Outsourcing) still grows although behind expectations.

  2. […] Hewitt’s Financial Results – What Do They Mean? by Technology analysis (technology-analysis) @ Fri, 17 Nov 2006 22:00:07 -0600 … it better and cheaper if they use the same people, process and technology. … Redefining the approach to HR BPO will be critical to the future success of … specializing in helping companies optimize their HR / benefits / payroll … ‘>Garden Essential Website Info Blog in a Box Food Original post: Hewitt’s Financial Results – What Do They Mean? by at Google Blog Search: hr technology […]

  3. […] growth and expansion into new business for 10 years. As noted previously, however, Hewitt’s well documented problems have not been growth based, but rather delivery and operations based. Fradin notes in the release: […]